How to get community funding for your business (6 Steps)

Today, there are ways that you can directly raise funds from your own community without the need to involve intermediaries.

If your business meets the basic requirements, raising funds directly from your clients and community can be a straightforward and efficient process.

There are products now available that allow you to set up the tools and vehicles to raise the funds, issue shares and follow up with your Investomers.

Deciding that you want to raise money from your own community and client base is a big step for any business and one that should not be taken lightly.

Even though raising funds from your customers can be cheaper and easier than raising them through traditional financial platforms and service providers, there are some things to consider.

In this article we will look at:

• Are you ready to raise funds from your community?
• Deciding how much community funding you want to raise
• Choosing a venue for financing
• Legal Issues
• Marketing a fundraising campaign to your community
• So you’ve successfully raised a round, what happens next? 

Are you ready for community funding?

Before going down the road of raising money from your customers and community, it is important that you understand if your business meets some of the requirements that can be helpful to be successful.

Large retail customer base

Having a solid number of already established clients is a big start to having a successful campaign. Raising money via your clients is a numbers game, and the more clients you have means more potential investors.

Engagement on social media

A solid online presence with up-to-date social media posts that leads to direct engagement with your clients gives your company several advantages.

1. It shows that you have an audience who are interested enough to take time to engage with your business online.
2. You have interesting content that warrants and creates engagement.
3. You have direct channels to immediately reach your clients or potential clients

Customer loyalty programs

While not as critical as the two elements above, having a successful customer loyalty program in place will directly enhance your potential to raise funds from your clients. 

The loyalty program shows that you have clients who are supportive of your business enough to be repeat customers and gain additional benefits.

By allowing them to invest, thereby gaining additional benefits will only increase your future loyalty program options.

Deciding how much money you want to raise

Before getting started with any type of equity community funded campaign, one of the first things your business should ask itself is how much money you actually want to raise.

Every business has its own life cycle and different needs depending on where they are. With this said, it is also very important that you are realistic with your own internal fundraising needs and potential.

Being able to clearly explain your fundraising goals, and what you plan on doing with those funds is imperative to a successful campaign.

What will the funds be used for?

Just like a traditional investor, your clients will want to understand what their money will be used for once they invest. Having a clear plan of execution for the money you are raising is crucial in order to win over potential investors and be successful with your funding round.

It is just as important to be able to clearly explain and break down this plan to your audience or community who would be looking to become potential investors.

This could be for new product R&D, new employees, increased marketing budgets and campaigns or whatever your business needs to help fuel its overall growth and success.

By explaining your goals, your clients will feel more comfortable investing their own money not just in your products or services, but in your business itself.

What is your company worth?

Once you decide how much you want to raise, the next step is deciding your company valuation and how much equity you will be giving away for that total investment.

Figuring out the valuation of your company is not a one size fits all approach. There are many factors to take into consideration when deciding your valuation, and what your community agrees your company is worth.

For public companies, figuring out the value is quite straightforward as there are public institutions set up to establish this. A company has publicly traded stock, each share has a price, and each company has a set amount of shares which creates the total public value.

For private companies, this can be a bit more of a difficult task to assess. These are four  main accepted approaches when it comes to the valuation of a Small or Medium business. These are:

Market Method: The market approach is a method of determining the value of an asset based on the selling price of similar assets. In this case you would seek out a company of similar size, industry, age and growth.(via Investopedia)

Income Method (DCF): The income approach, whose most popular and frequently applied method is the Discounted Cash Flow (DCF) method, is based on prospective financial information (via IFAC). While this enables one to take into account the specifics of the company then it is quite a work consuming and costly exercise to compile a DCF report.  

Multiplier Method: The value of a company is found by multiplying the profits by a multiplier. The most common multiplier for SME’s is 3-4 but can be 5 depending on the circumstances. 

Cost Method: The cost approach takes the basis of how much it would cost to build a similar business or company to the current status of the company being valued.

Although these are the main approaches when it comes to valuing your company, there are many other things to consider such as IP, patents, product potential and more that could add additional value.

How much equity should you give away to investors?

By using the above examples, we can create a simple formula that shows us how much equity should be given away for a particular round of funding.

If for example a company was looking to raise $100,000, and they came to the conclusion that their company was worth $1,000,000, then they could expect to give away around 10% of the company’s shares for that round of funding.

However, with funding from the community, there is not always an exact amount that can be reached as platforms usually provide the option for a company to exceed their funding goals.

When this is the case, you can expect to potentially give away more shares with a higher investment amount based on the share and company valuation.

The biggest variation becomes convincing and proving to potential investors your company’s valuation throughout your campaign.

Choosing a venue for fundraising

When looking to raise money from your community, there are two primary ways of accomplishing this.

Public Equity crowdfunding platforms

Public crowdfunding is what you think of for traditional crowdfunding platforms. This includes major platforms like Kickstarter, Indiegogo and GoFundMe, Fundwise, Funderbeam.

On these platforms, you are able to launch a crowdfunding campaign directed at both your clients and the users of the platform in order to raise as much money as possible. 

While these campaigns can be extremely beneficial, they can also be costly.  Normally, companies turn to public crowdfunding platforms when they have a new project, a new product, or even a new company to launch.

We can see from this list of the most successful Kickstarter projects of all time that most of the companies listed launched a new product or service to raise their money.

These large crowdfunding sites also come with a supply of ready to invest users. These users are specific types of people who enjoy being first-users and supporting up-and-coming projects. Although this can be a huge boost, it also limits the overall audience of who would be interested in your project.

Direct  Community crowdfunding

Direct crowdfunding works a bit differently than its public alternative. With the technology and products available today you can raise money directly from your community through your own website or social media.

The benefits of this include lower costs, lower fees to crowdfunding platforms and overall more control over the entire process. 

One of the big advantages of raising funds directly from your community is the existing level of relationship and trust between your company and its customers (potential investors) which makes clients invest more likely and at lower cost. You also offer exclusivity and you are offering investment opportunities to your clients. You can give them an opportunity that not everyone has access to. By creating exclusivity you are creating demand, motivation and urgency.

By doing this you are increasing the benefits to your clients directly. You can allow them access to become investors which results in increased customer loyalty, increased evangelism and overall more sales and profitability in the long run.

Legal Issues around community funding

The main legal issues that you should tackle include the following:

• Passing shareholders resolution for capital increase (in case you issue new shares to your investomers).
• Compiling investor presentations and making sure that all information there is correct and no undue promises are made regarding the future of the company.
• Deciding if a company needs to compile and register a prospectus. Most EU countries have established a minimum amount of capital below offering of which the prospectus registration is not required. For example, in Estonia, this is 2,500,000 euros which means that a company that offers its shares to its customers (retail investors) does not have to register a prospectus if the offering is below this amount, regardless of the number of investors. 
• There may be certain requirements applicable in the case of offering securities to other countries, e.g. U.S. This should be explored beforehand. 

While all those issues could be tackled with relative ease they should be given prior consideration and when needed, including consulting with legal counsel. 

Marketing for your community funding

Once you’ve decided that your business is ready to launch a direct community funding campaign, it is time to strategize how you will communicate this to your community of customers, clients and investors.

One of the easiest ways to get started is to break down your campaign to three stages:

• Pre-campaign launch
• Launch
• Post-campaign launch

Pre-campaign launch

Communication and marketing efforts aimed at your current customer base along with new potential clients and backers. There is a lot of content that dives deep into setting up your company and campaign for launch.

Most importantly is to prep your content, build up your email address book and test out marketing creatives before launch day arrives.

Chipin breaks down 8 big tips for successful crowdfunding pre-launch here.

Launch

Once your project is ready to launch, you can put use to all of the preparation done in the pre-launch stages.

Launching email blasts, running paid ad campaigns, PR and influencers are a great way to get the word out and start getting traffic and investments on your campaign.

Here is a great read from EU Startups about everything you need to know about launching a crowdfunding campaign. Although the article deals with crowdfunding through platforms then the considerations are equally applicable when raising funds directly from your customers. 

Post-campaign launch

Once your campaign is complete, it is time to move on to the next steps. This includes following up with your investors via email on the project, their investment, and what comes next. 

You successfully raised money, what happens next?

Now you have successfully raised a round of crowdfunding (Congratulations!), where do you go from here?

In addition to the responsibility to invest and spend wisely you also have to deal with a slew of new investors.

Communicating with Shareholders

Reporting and keeping your new investors up to date will be crucial to your company’s success along with the relationships with shareholders.

A company called Hours, who raised a successful private crowdfunding round on their own custom platform, sends out weekly email updates to their investors. These emails include updates on progress, previews of new features and a survey to collect feedback.

They’ve also set up a slack channel for their top backers and supporters. According to the company, this was their best decision as backers are extremely active and motivated to help the company. Giving them direct access to the team has resulted in extra motivation.

Some other ideas include a weekly/monthly webinar, newsletter or a chat group if you can manage the workload. 

The main focus here is that raising the money is only part of the battle, successful implementation and communication is key to long-term success.

Tracking Investors and maintaining investors’ register

Now that you have your investors on board, it’s up to you to track and keep a record of your companies shares and the investors that hold them. You should also be keeping an investors’ register as this is an obligation of the management board. 

How you exactly accomplish this is up to you – there are several options out there on the market. 

Secondary market

Giving investors the option to buy and sell their shares on a secondary market would enable existing investors to exit fully or partially and also give new investors (could also customers who did not for some reason participate in the funding round) the possibility to acquire shares. This, in turn, would enable the company to gain more investomers with all the benefits. 

There are several solutions being offered on the market which help you to arrange the secondary market for your investors. 

Is community funding right for your business?

Making the decision to launch a community fundraising campaign is not one to be taken lightly. 

After taking all of the above into consideration, it should also be noted that this is just half the battle. Because once the campaign is over and you have raised funds from your clients, it becomes time to deliver on their investment.